In re Super Micro Computer, Inc. Securities Litigation

Background

Joseph Averza filed a securities-fraud action against Super Micro Computer, Inc. and certain executives. The Private Securities Litigation Reform Act (PSLRA) requires a court to select the class member or group most capable of adequately representing the putative class as lead plaintiff.

The court followed the PSLRA’s three-step selection process. After notice of the action, ten lead-plaintiff groups sought appointment, although eight later withdrew. The court initially found Crain Walnut Shelling, LP to be the presumptively most adequate plaintiff. The court then allowed Universal-Investment-Gesellschaft mbH to try to rebut that presumption through limited discovery and briefing. The court ultimately found that Universal had rebutted the presumption and denied Crain Walnut’s lead-plaintiff motion.

After the other remaining candidates withdrew or did not continue seeking appointment, the court appointed Universal as lead plaintiff. The court also allowed Crain Walnut to seek reconsideration. Crain Walnut asked the court to reconsider its lead-plaintiff decisions, vacate Universal’s appointment, and appoint Crain Walnut instead.

Legal standard

The court explained that reconsideration of an interlocutory order—an order entered before final judgment—is an extraordinary remedy. Under the governing standard, reconsideration should be granted sparingly based on newly discovered evidence, clear error, or an intervening change in the law.

Analysis

Crain Walnut challenged the standard of proof used to determine whether Universal had rebutted the presumption that Crain Walnut was the most adequate plaintiff. The court had previously held that Universal could rebut the presumption by presenting evidence creating a “genuine and serious doubt” about Crain Walnut’s adequacy and typicality. Crain Walnut argued that the PSLRA required proof by a preponderance of the evidence, meaning evidence showing that something was more likely true than not.

The court held that Crain Walnut had not shown that its standard was clearly erroneous. It reasoned that the PSLRA’s use of the word “proof” did not specify how much or how convincing the evidence had to be. The court also concluded that the “genuine and serious doubt” standard was consistent with the statutory goal of selecting the class member most capable of adequately representing the class. The court added that Universal would have rebutted the presumption even under the preponderance-of-the-evidence standard.

Crain Walnut also argued that the court had failed to provide required procedural protections before finding it inadequate. The court said it was uncertain whether the cited Ninth Circuit guidance applied to this situation. Even assuming that it did, the court concluded that Crain Walnut had waived the protections by failing to object to Universal’s final supplemental brief or seek permission to respond. The court further held that the reconsideration process gave Crain Walnut an opportunity to respond, so reconsideration was not warranted on procedural grounds.

The court reconsidered several factual findings. It concluded that Crain Walnut’s late production of a margin agreement resulted from a good-faith disagreement and that ambiguities concerning redactions in a trust document meant those issues should no longer contribute to the inadequacy finding.

The court nevertheless upheld its findings concerning testimony by Crain Walnut’s designated representative, Charles Crain, Jr. In that testimony, he stated that he would not produce personal financial records if Crain Walnut were required to produce them. The court rejected Crain Walnut’s explanations that he had misunderstood the question or was referring only to a demand from Universal’s counsel. The court found the exchange clear and concluded that the testimony showed an unwillingness to fully participate in discovery if the court ordered such production. The court also upheld its finding that inaccuracies in Crain Walnut’s filings regarding its ownership structure supported inadequacy, particularly because the inaccuracies persisted after Universal identified them.

The court concluded that the testimony alone was enough to create genuine and serious doubt about Crain Walnut’s adequacy, and that the filing inaccuracies were independently sufficient under that standard. Under the preponderance standard, the court found that the testimony combined with the filing inaccuracies demonstrated inadequacy, even though the inaccuracies alone would not have been enough under that standard.

Finally, the court rejected Crain Walnut’s claim that it had applied a double standard by scrutinizing Crain Walnut but not Universal. The court explained that Universal properly challenged Crain Walnut’s adequacy, while no active lead-plaintiff candidate properly challenged Universal’s adequacy after Universal became the selected plaintiff. The court said it could not independently pursue earlier, undeveloped challenges to Universal, and no plaintiff requested discovery into Universal.

Disposition

Judge Edward J. Davila denied Crain Walnut’s motion for reconsideration. The opinion does not state that the motion was denied with or without prejudice.